What is the explanation for neo-liberalism sweeping aside nearly all other ways of running a capitalist economy in the last quarter century?

This is something which has long perplexed sections of the anti-capitalist movement. After all, the dominant model of running capitalism until the mid-1970s, that based upon extensive state intervention, was accompanied by higher growth rates and lower levels of unemployment than was the case in most countries once neo-liberalism took over.

This has led some people, particularly some of the most prominent people in ATTAC in France, to see neo-liberalism as a sort of ideological infection that has altered the ways of thinking of decision makers – and the fight against it as a purely ideological battle, oriented on re-educating them.

Duménil and Lévy’s latest book challenges this approach. It sees neo-liberalism as a result of a very material fact: the downturn in profit rates in the 1970s and after. This was not a result, as many economists held at the time, either of rising working class living standards or of the sudden increase in oil prices in the mid-1970s and the beginning of the 1980s. Rather neo-liberalism was an attempt by capitalism to reverse the trend in profit rates by an onslaught on the mass of the world’s population. They make the point with a series of very useful tables and graphs showing profit rates and the share of labour and capital in national outputs.

Their account goes adrift, however, in two different ways.

First, there is their theoretical explanation for the fall in profit rates. The amount of investment in means of production per employed worker grew more rapidly than output, and this, they point out, means the profits per unit of investment were bound to fall unless workers’ living standards were cut. They present this as an argument based on Marx.

But, unlike him, they see the decline in output as a result of a non-economic cause, a reduced flow of technological innovations into the production process – a position reminiscent of that held by anti-Marxist ‘long wave’ theorists like Kondratiev and Schumpeter. From this they conclude that an increased flow of innovations could reverse the trend in profit rates and open up a brighter future for the system. They claim there is ‘a countertrend to the decline in the profit rate’ resulting from ‘an increase’ in the ‘productivity of capital’.

Marx, by contrast, saw the fall in the rate of profit as the other side of the capitalist success in increasing physical productivity per worker by using more means of production. The more innovations come on line as a result of increased accumulation, the more physical output per worker rises. This should make capitalists happy – and it does insofar as they are trying to out-compete rival capitalists. However, it has negative implications for the capitalist class as a whole. Its concern is not with physical output as such (with ‘use values’), but with the price to be got for selling this output – and price, Marx pointed out (building on the insights of Adam Smith and David Ricardo) is a reflection of the average amount of labour needed to produce something through the system as a whole. The more physical productivity increases, the less labour is needed to produce each item – and the more prices will tend to fall.

This is not always something easily visible, since there is a tendency under present day capitalism for all prices to rise at a greater or slower speed as governments print paper money and bank credits create additional buying power. But the prices of goods in sectors experiencing faster technological advance fall relative to those advancing more slowly (so in the last 20 years the prices of televisions compared with beer have fallen enormously). And prices in the most advanced sectors fall at a massive rate. Witness the way in which the price of a computer like that used to write this article has fallen by half in just four years. (Such changes due to rapid innovation incidentally create enormous difficulties when it comes to measuring ‘economic growth’ in terms of use values over time, difficulties which the authors ignore when judging the flow of innovations as ‘more productive’ in some periods than others).

The conclusion for Marx, then, is the opposite of the conclusion for Duménil and Lévy. For him, the faster the rate of innovation – the faster the rate of productivity in terms of material output – the more difficult it is for capitalists to produce enough extra value to sustain their profit rates.

The second problem with their approach is their tendency – common to much recent French writing on the subject – to identify the advance of neo-liberalism with what they call ‘finance capital’.

The term has been used for over a century in Marxist writings and features in the classic accounts of imperialism by Hilferding, Lenin and Bukharin. But it has two distinct meanings. One sees it as referring to the merging together of financial and industrial capital, both moving together in the direction of state monopoly capitalism and then state capitalism. The other sees it as referring to the banks and other financial institutions acting in opposition to the interests of industrial capital, resulting in a different dynamic of development of the system.

This second sense is the one employed by Duménil and Lévy. They see finance as responding to the crisis of industrial capital caused by the falling rate of innovations, and therefore profits, in the late 1970s by staging a ‘coup’ (pp. 86 and 99) by which it took control of the policies of the international capitalist class. Finance wanted high interest rates. But it could not get them without overturning the logic of industrial capital, which they describe as the ‘Keynesian’ approach based on accumulation through a ‘compromise’ with working class organisations on the terrain of the welfare state (p. 186). In its place there was to be a thrust to remove any constraints on the flows of finance to wherever the rate of return might momentarily be greatest, privatising and pillaging the whole world in the process, and an onslaught on workers’ wages and conditions.

This, they claim, helped overcome the decline in profit rates, but in a way that was disadvantageous to industrial capital. ‘The benefit of the rise in profit rates, in which wage concessions played a major role, was siphoned off by the holders of capital through the rise in real interest rates and massive dividend distribution’ and ‘did not stimulate savings and especially the accumulation of capital’ (p. 128).

The supposed ‘coup’ by some sections of capital against others did not only help finance in general, but also, according to them, helped one part of the system, the United States, to cement its hegemony over the others, because of the role of the dollar in international finance. In the process those that suffered were not only the workers of the West and Third World countries, but also ‘a dominated country, like France’.

The Duménil-Lévy picture of the rise of ‘finance’ is not wholly wrong (I referred to it in my Explaining the Crisis, written over 20 years ago). But the account of a ‘coup’ leading to the domination of industry by finance and of some advanced capitalist countries by others is. It sees things back to front. The growing importance of circuits of finance to the world system was not something in opposition to the direction of industrial capitalism, but a product of trends in its development.

The stage of capitalist development from the early 1930s to the early 1970s was characterised by the development of monopolies within each capitalist country and greater or lesser degrees of the merger of their directions with that of the state (the culmination of the trend already present at the time of the First World War towards state capitalism).

This was not some benevolent occurrence, as terms like ‘the Keynesian compromise’ seem to imply. It was based upon the drive to the barbarity of all-out world war until 1945 and then upon the nuclear permanent arms economy of the Cold War (with its horrific wars in Korea, Algeria and Vietnam); full employment was an unintended by-product of military competition, and although it led, in most advanced countries, to concessions to the working class, in many Third World countries the price of accumulation was dictatorship and poverty for the masses (South Korea, Taiwan, China, especially during the so called ‘Great Leap Forward’, the East European states, and intermittently the major Latin American states).

In any case, this strategy ceased to work by the mid-1970s. Countries with low levels of arms spending were able to invest proportionately more than those with high levels while benefiting from their markets, and expanded more rapidly than them. And everywhere accumulation began to burst out of the constraints of nationally regulated economies. World trade grew more rapidly than world production, the most successful companies were those that began to organise production on a regional or even a global basis, and innovations in the most technologically advanced sectors required levels of resources that very few nationally based industries could dream of drumming up.

The state could no longer organise capitalism on a national basis – and attempts to do so were by the mid-1970s increasing inflation (or in Eastern Europe and the USSR ‘hidden inflation’ which expressed itself as growing shortages) without stopping the trend towards stagnation. In reaction, each national ruling class in turn opted to take advantage of rising unemployment to launch attacks on the concessions made to workers in the previous period and to bet upon the ability of at least some nationally based firms to make it into the new world of transnational competition by dropping restrictions on their ability to move funds as they wished.

One product of this crisis was the mushrooming of the circuits of international finance. Faced with difficulties achieving the old rates of profit at home, everywhere capital (not just financial capital, but industrial capital as well) scoured the world for any opportunity for profit-making. Where productive investment seemed to offer little reward, every sort of speculation was tried – although since speculative profits ultimately depend upon value that is created in production, this was bound to be self-defeating in the long run and the succession of speculative bubbles would feed back into the real economy and damage it.

Duménil and Lévy describe – and sometimes do so very well – individual aspects of this process. But they misunderstand completely the dynamic driving it forward, a dynamic based in industry and not just in finance. They do not see sufficiently that the circuits of finance depend upon the circuits of industrial production, even if they then influence them.

This matters, because just as they conclude that a new surge in innovation can bring the crisis of profit rates to an end, they also conclude that a new Keynesianism may be a way to end the crisis in the interest of industrial capitalists and workers alike. They write of the ‘Keynesian view of the history of capitalism, including its current problems’ that ‘it is very sensible’ and ‘one can only regret that the political conditions of recent decades have not made it possible to stop the neo-liberal offensive and put to work alternative policies – a different way of managing the crisis – in the context of other social alliances’ (p.201). While thus regretting that the capitalist state has failed to stabilise the system, they leave open the possibility that it might succeed in doing so in future. ‘The method by which neo-liberalism can be bypassed is not yet determined – will it be gradual reform, if capitalism is capable of slowing down the excesses of finance, or violent shift, in the case of a major financial crisis.’

There is much that is of value in this book, and readers must hope that it appears in paperback so as to be more readily accessible. But the authors’ failure fully to understand the starting point of Marxist political economy and their failure to unpick the ambiguities of the term ‘finance capital’ prevent them arriving at a full appreciation of the dynamic of capitalism today.